The dangerous race to rank high for low taxes threatens NC’s well-being and its future

In recent decades, the Republican Party has staked much of its reputation on its supposed superior economic policies. Its leaders are largely in lockstep with the notion that tax cuts are the highest priority, and that comprehensive health care, job security, unemployment insurance, and an increased minimum wage are unaffordable luxuries.

A few years ago, North Carolina became the host of an ongoing experiment as its GOP leaders began implementing policies aligned with economist Arthur Laffer and the American Legislative Exchange Council (ALEC). In Laffer and ALEC’s annual publication “Rich States, Poor States,” the authors define an Economic Outlook (EO) index and promise that “if state legislators will make it a priority to improve on [the index] they will be rewarded with faster growth and more jobs in their state.”

North Carolina Republicans beginning in 2011 made it their mission to improve the state’s EO rankings. It did so by cutting taxes, reducing government jobs, reducing worker-compensation outlays, reducing unemployment-insurance benefits, and similar policies. By 2013 North Carolina ranked 6th in the EO index and moved up to 2nd in 2015. In ALEC’s most recent EO index, North Carolina ranks 5th. The Republican leadership apparently sees the current budget season as an opportunity to improve this rank further through additional cuts in tax rates.

We believe that it is cruel and dangerous to continue with this strategy. North Carolina’s “improved” EO ranking was made possible thanks to ignoring or rejecting policies that arguably improve people’s lives more than tax cuts —issues such as public K-12 education funding, Medicaid expansion, unemployment insurance and infrastructure.

Rankings disconnect

We have recently examined whether these EO rankings are reliable predictors of better economic performance in the future. Our paper documents no systematic state economic performance improvements from having higher Economic Outlook rankings. The numbers below are illustrative: those with high EO rank did not generally have faster growth in per capita gross state product.

• Here are the top six states on ALEC’s Economic Outlook index for 2013

1. Utah

2. South Dakota

3. Indiana

4. North Dakota

5. Idaho

6. North Carolina

• Here is how those states ranked (out of 50) in per capita growth rate for the period from 2012 to 2019:

5. Utah

45. South Dakota

22. Indiana

49. North Dakota

6. Idaho

30. North Carolina

What state had the most rapid per-capita growth in this period? California (which had an EO rank of 47 in 2013).

North Carolina’s relatively modest per capita growth rate (#30 in the nation) from 2012 to 2019 was paired with an unchanged poor ranking (#40 in the nation) in real median household income. And while in 2015 to 2019 North Carolina ranked #19 in the share of the economy paid out in business income, it ranked only #33 in the share of the economy allotted for worker compensation.

It is naïve and dangerous to align far-reaching tax and spending policies with myopic and simplistic rankings. This fiscal policy has failed the people of North Carolina, both by ignoring those in need and in underinvesting in our future. It should be reversed.